UK's Osborne gives Bank of England new powers over mortgages

Thursday, 12 Jun 2014 | 12:54 PM ETReuters

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British finance minister George Osborne said on Thursday that he would give the Bank of England stronger powers to curb mortgage lending and reduce the risks that the housing market poses to financial stability.

British house prices have risen by 11 percent over the past year and are close to pre-crisis levels. The International Monetary Fund urged Britain last week to take steps to cool the housing market and reduce the risk of a bubble.

Osborne, in comments released before he gives a major speech in London, said the housing market was not an immediate threat to Britain's financial stability but could become one in future.

Simon Dawson | Bloomberg | Getty Images

George Osborne, U.K. chancellor of the exchequer.

"I am acting against future risks in the housing market by today giving the Bank of England new powers to intervene and control the size of mortgages," he said.

The central bank will in future be able to stop Britons taking out mortgages that are too big compared with their income or the value of their home, rather than just make suggestions to lenders as it does now.

Osborne also announced changes to planning rules and limited funding that he said would allow as many as 200,000 homes to be built on former industrial sites in urban areas.

The opposition Labour party has criticised the government for not building enough homes since it came to power in 2010, calling on it to introduce more schemes to help homebuilders. Labour says the government has presided over the lowest level of peace-time homebuilding since the 1920s.

BoE Governor Mark Carney, who is due to speak alongside Osborne on Thursday, has called the housing market the biggest domestic risk to Britain's financial stability. The BoE's Financial Policy Committee meets next week and is expected to take some steps to cool the market, though Carney has noted the BoE cannot tackle underlying problems such as housing shortage.

Osborne said the BoE should not hesitate to act if needed, and noted that loan-to-income ratios were at a new high, although loan-to-value ratios were well below their peak.

Osborne also defended his Help to Buy scheme, which he began last year and which broadens access to high loan-to-value mortgages, although he said it would not be immune if the BoE did choose to impose loan-to-value or loan-to-income caps.

But the BoE will not be able to use its new powers quite yet. They will need to be turned into law, which Osborne said he would do before the next national election in May 2015.

The FPC only gained formal powers last year, as part of a revamp of Britain's bank regulation after the financial crisis. Allowing it to set caps on mortgage loan-to-value and loan-to-income ratios was seen as too politically sensitive, since it risked putting the BoE in the position of effectively denying prospective home-buyers a mortgage.

Earlier on Thursday, business minister Vince Cable said he was "concerned" about rising house prices. Previous housing booms showed that mortgage loans of around 3 to 3.5 times people's incomes were stable, he said, and he was "appalled" to see some banks lending as much as five times income.

"This is the key area that Bank of England has got to operate into and make sure that this boom in house prices, particularly in the south of England, doesn't destabilise the whole economy," Cable told BBC Radio's Today program.

Lloyds Banking Group and Royal Bank of Scotland both said recently that for loans over 500,000 pounds ($839,500), they will no longer give mortgages of more than four times a borrower's income.

But views differ among policymakers on the importance of rising house prices as a risk to Britain's financial stability.

BoE policymaker Ben Broadbent, who in July will become deputy governor, said on Wednesday the housing market upturn bears little resemblance to the debt-fuelled booms of the past, adding that it was more important to watch leverage than prices.